Does Ownership Structure and Financial Health Affect Firm’s Earnings Quality? Evidence from Emerging Economy
DOI:
https://doi.org/10.61506/01.00227Keywords:
earnings quality, earnings persistence, predictability, smoothness, financial distress, family firmsAbstract
Earnings quality is a demanding attribute of firm and is valued by investors in resource allocation decisions. High earnings quality firms create value for stakeholders and poor earnings quality causes value deterioration. This study takes into account earnings quality attributes of Pakistani corporate sector and investigates impact of ownership structure and financial health on firms’ earnings quality. Earnings quality has been measured by four attributes of accrual quality, earnings persistence, earnings predictability, earnings smoothness. A sample of 325 non-financial PSX listed Firms have been selected and classified into four unique categories on the basis of financial health (healthy and distressed) and ownership (family and non-family). The classification aims to determine level of earnings quality for each category. Results find significant effect of book financial position and ownership structure on earnings quality of firms. Findings reveal Earnings quality for non distressed family (NDF) firms was highest followed by non distressed non family firms (NDNF), while earnings quality for distressed family (DF) firms was poor and poorer for distressed non family (DNF) firms when firms were classified into these four categories. These results provide important implications for investors, analysts, regulators and standard setters.
References
Altman, E. I., Iwanicz‐Drozdowska, M., Laitinen, E. K., & Suvas, A. (2017). Financial distress prediction in an international context: A review and empirical analysis of Altman's Z‐score model. Journal of international financial management & accounting, 28(2), 131-171. DOI: https://doi.org/10.1111/jifm.12053
Anam, H. (2023). Determinants of earnings quality: An empirical study in Indonesia. Akuntansi dan Teknologi Informasi, 16(1), 49-62. DOI: https://doi.org/10.24123/jati.v16i1.5258
Ball, R., & Shivakumar, L. (2008). Earnings quality at initial public offerings. Journal of accounting and economics, 45(2-3), 324-349. DOI: https://doi.org/10.1016/j.jacceco.2007.12.001
Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of accounting and economics, 29(1), 1-51. DOI: https://doi.org/10.1016/S0165-4101(00)00012-4
Barth, M. E., & Schipper, K. (2008). Financial reporting transparency. Journal of Accounting, Auditing & Finance, 23(2), 173-190. DOI: https://doi.org/10.1177/0148558X0802300203
Barth, M. E., Landsman, W. R., & Lang, M. H. (2008). International accounting standards and accounting quality. Journal of accounting research, 46(3), 467-498. DOI: https://doi.org/10.1111/j.1475-679X.2008.00287.x
Basu, S. (1997). The conservatism principle and the asymmetric timeliness of earnings1. Journal of accounting and economics, 24(1), 3-37. DOI: https://doi.org/10.1016/S0165-4101(97)00014-1
Beekes, W., Pope, P., & Young, S. (2004). The link between earnings timeliness, earnings conservatism and board composition: evidence from the UK. Corporate Governance: An International Review, 12(1), 47-59. DOI: https://doi.org/10.1111/j.1467-8683.2004.00342.x
Beyer, A., Guttman, I., & Marinovic, I. (2019). Earnings management and earnings quality: Theory and evidence. The Accounting Review, 94(4), 77-101. DOI: https://doi.org/10.2308/accr-52282
Bhattacharya, N., Black, E. L., Christensen, T. E., & Larson, C. R. (2003). Assessing the relative informativeness and permanence of pro forma earnings and GAAP operating earnings. Journal of Accounting and Economics, 36(1-3), 285-319. DOI: https://doi.org/10.1016/j.jacceco.2003.06.001
Chen, K. Y., Elder, R. J., & Hsieh, Y. M. (2007). Corporate governance and earnings management: The implications of corporate governance best-practice principles for Taiwanese listed companies. Journal of Contemporary Accounting & Economics, 3(2), 73-105. DOI: https://doi.org/10.1016/S1815-5669(10)70024-2
Comiskey, E. E., & Mulford, C. W. (2000). Guide to financial reporting and analysis. (No Title).
Dang, H. N., Nguyen, T. T. C., & Tran, D. M. (2020). The impact of earnings quality on firm value: The case of Vietnam. The Journal of Asian Finance, Economics and Business, 7(3), 63-72. DOI: https://doi.org/10.13106/jafeb.2020.vol7.no3.63
DeAngelo, H., & DeAngelo, L. (1985). Managerial ownership of voting rights: A study of public corporations with dual classes of common stock. Journal of Financial economics, 14(1), 33-69. DOI: https://doi.org/10.1016/0304-405X(85)90043-1
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings: The role of accrual estimation errors. The accounting review, 77(s-1), 35-59. DOI: https://doi.org/10.2308/accr.2002.77.s-1.35
Dechow, P. M., & Schrand, C. M. (2004). Earnings quality.
Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting material accounting misstatements. Contemporary accounting research, 28(1), 17-82. DOI: https://doi.org/10.1111/j.1911-3846.2010.01041.x
Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management. Accounting review, 193-225.
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, 50(2-3), 344-401.
Dechow, P., Ge, W., & Schrand, C. (2010). Understanding earnings quality: A review of the proxies, their determinants and their consequences. Journal of accounting and economics, 50(2-3), 344-401. DOI: https://doi.org/10.1016/j.jacceco.2010.09.001
Dichev, I. D., Graham, J. R., Harvey, C. R., & Rajgopal, S. (2013). Earnings quality: Evidence from the field. Journal of accounting and economics, 56(2-3), 1-33. DOI: https://doi.org/10.1016/j.jacceco.2013.05.004
Easley, D., & O'hara, M. (2004). Information and the cost of capital. The journal of finance, 59(4), 1553-1583. DOI: https://doi.org/10.1111/j.1540-6261.2004.00672.x
Ecker, F., Francis, J., Kim, I., Olsson, P. M., & Schipper, K. (2006). A returns‐based representation of earnings quality. The Accounting Review, 81(4), 749-780. DOI: https://doi.org/10.2308/accr.2006.81.4.749
Eisenhardt, K. M. (1989). Agency Theory: An Assessment and Review. Academy of Management Review, 14(1). DOI: https://doi.org/10.2307/258191
Francis, J., Huang, A. H., Rajgopal, S., & Zang, A. Y. (2008). CEO reputation and earnings quality. Contemporary accounting research, 25(1), 109-147. DOI: https://doi.org/10.1506/car.25.1.4
Francis, J., LaFond, R., Olsson, P. M., & Schipper, K. (2004). Costs of equity and earnings attributes. The accounting review, 79(4), 967-1010. DOI: https://doi.org/10.2308/accr.2004.79.4.967
Gaio, C., & Raposo, C. (2011). Earnings quality and firm valuation: international evidence. Accounting & Finance, 51(2), 467-499. DOI: https://doi.org/10.1111/j.1467-629X.2010.00362.x
Hussain, A. (2014). Banking Privatization and Profitability in Pakistan: A Time Series Analysis. Journal of Business and Economic Options, 1(1), 30-37.
Jones, J. J. (1991). Earnings management during import relief investigations. Journal of accounting research, 29(2), 193-228. DOI: https://doi.org/10.2307/2491047
Khan, M. A. (2022). The Impact of Earnings Management on Financial Metrics: Insights from Pakistani Firms. Journal of Business and Economic Options, 9(3).
Khuong, N. V., Abdul Rahman, A. A., Thuan, P. Q., Liem, N. T., Anh, L. H. T., Thuy, C. T. M., & Ly, H. T. N. (2022). Earnings management, board composition and earnings persistence in emerging market. Sustainability, 14(3), 1061. DOI: https://doi.org/10.3390/su14031061
Kothari, S. P., Leone, A. J., & Wasley, C. E. (2005). Performance matched discretionary accrual measures. Journal of accounting and economics, 39(1), 163-197. DOI: https://doi.org/10.1016/j.jacceco.2004.11.002
Lambert, R., Leuz, C., & Verrecchia, R. E. (2007). Accounting information, disclosure, and the cost of capital. Journal of accounting research, 45(2), 385-420. DOI: https://doi.org/10.1111/j.1475-679X.2007.00238.x
Levitt, A. (1998). The importance of high quality accounting standards. Accounting horizons, 12(1), 79.
McVay, S. E. (2006). Earnings management using classification shifting: An examination of core earnings and special items. The accounting review, 81(3), 501-531. DOI: https://doi.org/10.2308/accr.2006.81.3.501
Melumad, N. D., & Nissim, D. (2009). Line-item analysis of earnings quality. Foundations and Trends® in Accounting, 3(2–3), 87-221. DOI: https://doi.org/10.1561/1400000010
Menicucci, E., & Menicucci, E. (2020). Earnings quality and earnings management. Earnings Quality: Definitions, Measures, and Financial Reporting, 53-82. DOI: https://doi.org/10.1007/978-3-030-36798-5_3
Namadi, S. (2023). Strategic Management of Outsourcing Balancing Profitability and Cost Control in Corporate Operations. Journal of Business and Economic Options, 10(4), 26-32.
Noury, B., Hammami, H., Ousama, A. A., & Zeitun, R. (2020). The prediction of future cash flows based on operating cash flows, earnings and accruals in the french context. Journal of Behavioral and Experimental Finance, 28. DOI: https://doi.org/10.1016/j.jbef.2020.100414
Papadopoulos, S. (2018). Essays on behavioral determinants of earnings quality.
Penman, S. H., & Zhang, X. J. (2002). Accounting conservatism, the quality of earnings, and stock returns. The accounting review, 77(2), 237-264. DOI: https://doi.org/10.2308/accr.2002.77.2.237
Penman, S. H., & Zhang, X. J. (2021). Accounting for asset pricing factors. Columbia Business School Research Paper. DOI: https://doi.org/10.2139/ssrn.3881177
Penman, S., & Zhang, X. J. (2020). A theoretical analysis connecting conservative accounting to the cost of capital. Journal of Accounting and Economics, 69(1), 101236. DOI: https://doi.org/10.1016/j.jacceco.2019.101236
Perotti, P., & Wagenhofer, A. (2014). Earnings quality measures and excess returns. Journal of business finance & accounting, 41(5-6), 545-571. DOI: https://doi.org/10.1111/jbfa.12071
Rahmat, M. M., Muniandy, B., & Ahmed, K. (2020). Do related party transactions affect earnings quality? Evidence from east Asia. International Journal of Accounting and Information Management, 28(1) DOI: https://doi.org/10.1108/IJAIM-12-2018-0146
Ramadan, I. Z. (2015). Earnings quality determinants of the Jordanian manufacturing listed companies. International Journal of Economics and Finance, 7(5), 140-146. DOI: https://doi.org/10.5539/ijef.v7n5p140
Scarso, L. (2019). Earnings quality: measures and determinants.
Schipper, K., & Vincent, L. (2003). Earnings quality. Accounting horizons, 17, 97-110.
Schipper, Katherine, and Linda Vincent. (2003). Earnings quality. Accounting horizons 17 (2003): 97-110. DOI: https://doi.org/10.2308/acch.2003.17.s-1.97
Shahzad, A., Nazir, M. S., Qamar, M. A. J., & Abid, A. (2023). Impact of corporate governance on firm value in the presence of earning quality and real earnings management. International Journal of Business Excellence, 29(3), 409-436. DOI: https://doi.org/10.1504/IJBEX.2023.129103
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting review, 289-315.
Subhani, I., Iqbal, J. Jamil, F., & Iqbal, J. (2022). Relevance of Earnings Metrics: A Comparative Analysis of EPS and CFO on the Pakistan Stock Exchange. Journal of Business and Economic Options, 9(4).
Visvanathan, G. (2006). An empirical investigation of ‘closeness to cash’as a determinant of earnings response coefficients. Accounting and Business Research, 36(2), 109-120. DOI: https://doi.org/10.1080/00014788.2006.9730013
Wahyudianti, S., Armeliza, D., & Muliasari, I. (2021). The Determinant Factors of Earning Quality. Jurnal Akuntansi, Perpajakan dan Auditing, 2(1), 109-125. DOI: https://doi.org/10.21009/japa.0201.07
Wang, Z., & Ahmad, R. (2015). Impact of Working Capital Management on Firm Profitability: Evidence from Pakistan’s Textile Sector. Journal of Business and Economic Options, 2(2), 55-61.
Watts, R. L. (2003). Conservatism in accounting part I: Explanations and implications. Accounting horizons, 17(3), 207-221. DOI: https://doi.org/10.2308/acch.2003.17.3.207
Watts, R. L. (2003). Conservatism in accounting-part II: evidence and research opportunities. Available at SSRN 438662. DOI: https://doi.org/10.2139/ssrn.438662
